The finance industry has a bad habit of making things seem more complicated than they are. Financial jargon is riddled throughout websites, and financial disclosures are difficult to read. It’s not that these terms are made difficult by accident. The harder it is to understand something, the more people are needed to decipher the true meaning. The financial industry is full of large bureaucratic environments, and bureaucracies thrive on confusion.
Unfortunately, the muck trickles down into personal finance as well. Individuals became frustrated and confused with what seems like a barrier to entry consisting of years of financial education before they can even buy a fund for their retirement portfolio.
Terms like front loaded funds, Class A shares, index funds, ETFs, mid-cap value, and asset allocation all seemingly join together in unison to say, “You cannot do this. You need a professional”.
In reality, the barrier to entry is quite small, and if you find a financial product that sounds too complicated, then you should ignore it. Never invest in something you don’t understand. Especially when it comes to personal investing, these complicated products are usually diseased with high fees and subpar returns.
Financial advisors understand financial market intimidation and use comments like:
- “You don’t know what you don’t know.”
- “I do this every day, let me handle it.”
- “You need me to help you handle your emotions with the market drops.”
They focus their sales pitch on the fear that would be DIY investors face. They are selling the opportunity to pair up with a knowledgeable warrior to fight through the financial jargon.
In reality, they charge you 1% of your portfolio to invest you in index funds (if they aren’t investing you in index funds, then you should be even more worried). A task that you can easily do on your own with the help of this site or a quick google search.
Don’t get me wrong, I understand the value of knowledge and have no problem paying a professional for tasks that I am not an expert. The issue is the price paid for the information. Financial advisors along with the finance industry have painted personal finance and investing as so complicated that it warrants thousands of dollars a year to manage.
A lesson from Pro Oil Pete: Imagine going to get your oil changed and Pete, the technician, tells you as complicated as he can what the benefits of having fresh oil in your car are and the dangers of not changing your oil. Pete tells you about cars he’s seen blow up from lousy oil or the time he saved a customer’s life because the oil pan lost a screw.
At the end of his schpeal, he tells you with a smile that you are lucky because he is here to change your oil for you. He can protect you from the bad things and bring you only the benefits of fresh oil.
He charges you $350 for the oil change and proceeds to unscrew the drain plug, change the oil filter, put the drain plug back in, and fill up your car with fresh oil. Once you found out that this is all he did, you would be furious. For $350 you would have done it yourself.
Every day individuals sign away 1% of their portfolio every year to have someone manage their investments. This fee is thousands of dollars every year for someone to do something easier than changing your oil because of the assumption that the task is difficult.
I know some people will prefer to outsource their investment management and financial planning. All I hope is that they do their research to make sure they are not paying $350 for a $19.99 oil change.
Some circumstances require an expert, but these are very rare and not applicable to the majority of individuals worried about paying off debt and saving for retirement.
There are good advisors out there, but finding ones that aren’t just selling products for a commission or investing client money for their own benefit is difficult and requires research all on its own. The best way to find a good financial advisor is first to be your own financial advisor, so you know what to look for.
Knowing how to manage your finances should not be optional, it is a skill that everyone should know how to do and then they can choose to outsource it to someone else. Not understanding how to handle finances and investments is a ripe opportunity to be taken advantage of by a shady investment advisor.
It’s unfortunate that so many people have no idea about how their finances are managed and are too intimidated to do something about it. My goal with this site is to provide a base level of confidence so that readers can be their own financial advisor and take control of their finances while saving the 1% per year along the way.